Edgar Filing: DYNABAZAAR INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO _________

COMMISSION FILE NUMBER 000-29423
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DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

888 SEVENTH AVENUE, NEW YORK, NY 10019
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 974-5730

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant COMMON STOCK, $0.001 PAR VALUE
to Section 12(g) of the Act: (Title of each class)
_______________

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $8,360,063 on March 26, 2005, based on the
closing sales price of the registrant's common stock as reported on the
Over-the-Counter Bulletin Board as of such date.

The number of shares outstanding of the registrant's common stock as of
March 26, 2005 was 26,967,944.

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DYNABAZAAR, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
INDEX

PAGE
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PART I. BUSINESS

Item 1. Business ............................................................................ 1
Item 2. Properties .......................................................................... 2
Item 3. Legal Proceedings ................................................................... 3
Item 4. Submission of Matters to a Vote of Security Holders ................................. 3

PART II

Item 5. Market for Registrant's Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................................... 3
Item 6. Selected Financial Data ............................................................. 4
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ....................................................................... 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 12
Item 8. Financial Statements and Supplementary Data ......................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ....................................................................... 12
Item 9A. Controls and Procedures ............................................................. 12
Item 9B. Other Information ................................................................... 12

PART III

Item 10. Directors and Executive Officers of the Registrant .................................. 12
Item 11. Executive Compensation .............................................................. 13
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .............................................................. 13
Item 13. Certain Relationships and Related Transactions ...................................... 13
Item 14. Principal Accountant Fees and Services ..............................................

PART IV

Item 15. Exhibits and Financial Statement Schedules .......................................... 13

SIGNATURES ........................................................................................ 16

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PART I

ITEM 1. BUSINESS.

THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED "FACTORS
THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION" ON PAGE 10 OF
THIS FORM 10-K. YOU SHOULD NOT PLACE UNDUE RELIANCE ON OUR FORWARD-LOOKING
STATEMENTS, AND WE ASSUME NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENTS.

OVERVIEW AND RECENT EVENTS

Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the "Company") was incorporated in
the State of Delaware in February 1997 as "Fairmarket, Inc." Through September
3, 2003, the Company was and online auction and promotions technology service
provider that enabled marketers to create results-oriented rewards programs and
helped commerce companies automate the process of selling their excess inventory
online to wholesale and retail buyers. On September 4, 2003, we sold
substantially all of our operating assets to eBay, Inc. ("eBay") for
consideration of $4.5 million in cash under the terms and conditions of an asset
purchase agreement we entered into with eBay on June 20, 2003. Following the
closing of the asset sale, we changed our name from "Fairmarket, Inc." to
"Dynabazaar, Inc."

We are currently reviewing alternatives for the use of our remaining assets,
which may include pursuing a plan of complete liquidation and dissolution,
possibly including the sale of our remaining assets. Alternatively, we may
decide to pursue selling our remaining assets outside of a liquidation and
dissolution, to make additional distributions of cash to our stockholders and/or
to explore other business opportunities unrelated to our historical business,
including the possible acquisition of other businesses. At this time, our Board
of Directors has not made any decision to pursue any one of these options and
has not identified any such opportunities. We cannot assure you that we will be
able to identify or successfully capitalize on any appropriate business
opportunities.

In January 2004, James Mitarotonda was appointed as our President and Chief
Executive Officer and Mel Brunt was appointed as our Chief Financial Officer. In
October 2004, Mr. Mitarotonda resigned as the Company's President and Chief
Executive Officer but remained a director of the Company. In December 2004, Mr.
William Fox became the Company's President and Chief Executive Officer.

In connection with the Company's cessation of its online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, 10019, an office maintained by Barington
Capital Group, LP ("Barington"), a limited partnership whose general partner is
a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is a director of the Company and our former
President and Chief Executive Officer. William Fox, the President, Chief
Executive Officer and a director of the Company, is the Vice Chairman of
Barington. Pursuant to an administrative services agreement we entered into with
Barington in December 2003 (which ran through December 31, 2004), we paid
Barington a monthly fee of $8,000 for performing certain administrative services
on behalf of the Company. In connection with the agreement, we also granted to
James Mitarotonda an option to purchase 320,000 shares of our common stock. The
option is fully exercisable and was granted with an exercise price per share
equal to $0.33, the fair market value of our common stock on the grant date. The
Company entered into an amended administrative services agreement with Barington
dated as of December 17, 2004. Under the amended agreement, which runs through
December 31, 2006, Barington is to be paid a fee of $15,000 per month for
performing certain administrative, accounting and other services on behalf of
the Company. In addition, Barington is to be paid a fee of $175 an hour for any
legal services provided by Barington on behalf of the Company at the Company's
request. The Company has also agreed that in the event that Barington identifies
for the Company, at its request, a business transaction such as a merger,
acquisition or joint venture, and/or provides the Company with financial
consulting or merger and acquisition services in connection with such business
transaction, the Company will pay Barington a fee to be agreed upon between
Barington and the Board of Directors of the Company. In connection with the
amended agreement, the Company granted options to certain designees of Barington
to purchase, in the aggregate, 320,000 shares of the Company's common stock at
an exercise price of $0.31 per share, the fair market value of the Company's
common stock on the grant date.

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On January 20, 2004, the Company executed a settlement agreement with Acquaport
Unicorn, Inc., the landlord of the Company's Woburn, Massachusetts headquarters,
providing for termination of the Company's lease in consideration of a cash
payment of $1.2 million. In March 2004, the cash payment was made and on April
9, 2004 our last employee was terminated and the premises vacated.

On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our independent
accountants and engaged Rothstein, Kass & Company, P.C. as our independent
auditors commencing with the audit of our financial statements for the year
ended December 31, 2003.

On June 22, 2004, the Board of Directors of the Company authorized the
termination of the Company's Shareholder Rights Agreement based on its
assessment that the termination of this agreement would benefit the Company's
stockholders and enhance the corporate governance practice of the Company. The
Company entered into Amendment No. 1 to the Shareholder Rights Agreement, dated
as of July 7, 2004, by and between the Company and EquiServe Trust Company,
N.A., as Rights Agent, which provided for the termination of the Company's
Shareholder Rights Agreement on July 31, 2004.

On June 15, 2004, we received a letter from the Nasdaq Stock Market notifying us
that, because the closing price of our common stock had closed below $1.00 per
share for 30 consecutive trading days and we do not presently conduct an
operating business, the Company's common stock would be delisted on June 24,
2004. Our stock now trades over the counter on the Nasdaq OTC Bulletin Board.

On August 20, 2004, the Company announced that the Board of Directors had
authorized the repurchase of up to 5 million shares of the Company's common
stock. To date, we have purchased 81,800 shares at an average price per share of
$0.2689.

On September 28, 2004, the Company executed a settlement with Regal House
Limited, the landlord of the Company's London, UK headquarters, providing for
termination of the Company's lease in consideration of a cash payment of
approximately $463,000. The cash payment was drawn from the security deposit of
approximately $569,000 held by the landlord. The remaining balance of $106,000
was returned to us.

As of September 30, 2004, we held an available-for-sale security in the form of
a United States Government Bond. On October 6, 2004, this position was
liquidated and re-invested in cash.

On December 17, 2004, the Board of Directors appointed Raymond L. Steele to
serve as a Class I director. On December 27, 2004, Joseph R. Wright, Jr.
resigned from the Board of Directors in order to devote additional time to his
position as President, Chief Executive Officer and a director of PanAmSat
Corporation, a global provider of satellite-based video, broadcasting and
network distribution and delivery services. On January 31, 2005, the Board of
Directors appointed Karen Schneider to serve as a Class II director.

ITEM 2. PROPERTIES

The Company's headquarters are located in New York City, in an office maintained
by Barington Capital Group, L.P., a limited partnership whose general partner is
a corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is a director of the Company and our former
President and Chief Executive Officer. William Fox, the President, Chief
Executive Officer and a director of the Company, is the Vice Chairman of
Barington.

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On September 28, 2004, the Company executed a settlement agreement with Regal
House Limited, the landlord of the Company's London, UK, headquarters, providing
for termination of the Company's lease in consideration of a cash payment of
approximately $463,000. The cash payment was drawn from the security deposit of
approximately $569,000 held by the landlord. The remaining balance of $106,000
was returned to us.

ITEM 3. LEGAL PROCEEDINGS

We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynabazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynabazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynabazaar's initial public offering which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10 (b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities of 1933, as amended. The Company has
entered into an agreement-in-principle to settle the remaining claims in the
litigation. The proposed settlement will result in a dismissal with prejudice of
all claims and will include a release of all claims that were brought or could
have been brought against the Company and its present and former directors and
officers. It is anticipated that any payment to the plaintiff class and their
counsel will be funded by the Company's directors & officers liability insurance
and that no direct payment will be made by the Company. The proposed settlement
is subject to the execution of a definitive settlement agreement, final approval
of the settlement by the Company's directors & officers liability insurance
carriers and by the plaintiff class, and the approval of the settlement by the
Court.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

PRICE RANGE OF COMMON STOCK

Our common stock trades on the Nasdaq OTC Bulletin Board under the
symbol "FAIM." Our common stock was quoted on the Nasdaq National Market, but
was delisted on June 24, 2004. The following table sets forth, for the periods
indicated, the high and low sale price per share of our common stock on the OTC
BB.

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HIGH LOW
---- ---

YEAR ENDED DECEMBER 31, 2004:
First Quarter.................................... $0.44 $0.32
Second Quarter................................... $0.39 $0.30
Third Quarter.................................... $0.31 $0.26
Fourth Quarter................................... $0.35 $0.27

HIGH LOW
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YEAR ENDED DECEMBER 31, 2003:
First Quarter.................................... $1.67 $1.42
Second Quarter................................... $2.00 $1.52
Third Quarter.................................... $1.71 $1.54
Fourth Quarter................................... $1.79 $0.31

As of March 26, 2005, there were approximately 177 holders of record of
our common stock.

We have not paid or declared any cash dividends on shares of our common
stock other than a $1.30 per share cash distribution that was declared in
October 2003 and paid in November 2003 to stockholders of record on October 20,
2003. The total amount of the distribution was approximately $35 million. Any
future determinations as to the payment of dividends on our common stock will
depend upon our capital requirements, earnings, liquidity and such other factors
as our Board of Directors may consider.

USE OF PROCEEDS FROM SALE OF REGISTERED SECURITIES

On March 17, 2000, we completed the sale of 5,750,000 shares of our
common stock in an initial public offering pursuant to a Registration Statement
on Form S-1 (File No. 333-92677), as amended, that was declared effective by the
Securities and Exchange Commission on March 13, 2000. The proceeds to us from
the initial public offering were $89.1 million, net of offering expenses. We
estimate that, as of December 31, 2004, approximately $35.3 million has been
used for working capital purposes, including approximately $5.1 million used for
the purchase of equipment, $4.0 million to repurchase 3.1 million shares of our
common stock from our founder, $35 million for the cash distribution paid in
November 2003 and $3.5 million for the September 2003 Series B repurchase and
liquidation preference. At December 31, 2004, substantially all of the remaining
net proceeds (approximately $9 million) were held in investments in
interest-bearing accounts.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this Report. The consolidated
statement of operations data for the years ended December 31, 2004, 2003, 2002,
2001 and 2000 and the consolidated balance sheet data as of December 31, 2004,
2003, 2002, 2001 and 2000 are derived from our audited consolidated financial
statements.

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue ............................................. $ -- $ 6,673 $ 5,747 $ 8,571 $ 10,937
Total operating expenses ............................ 2,227 12,752 29,075 51,688 66,732
Loss from operations ................................ (2,227) (6,079) (23,328) (43,117) (55,795)
Net loss ............................................ (1,962) (4,599) (21,977) (40,183) (51,267)
Basic and diluted net loss per share ................ $ (0.07) $ (0.18) $ (0.79) $ (1.39) $ (2.15)
Shares used to compute basic and diluted
net loss per share ............................... 27,024 26,796 28,080 28,870 23,811

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DECEMBER 31,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities .... $ 8,989 $ 10,697 $ 54,734 $ 63,372 $ 76,104
Working capital ..................................... 9,124 5,547 39,572 40,411 79,075
Total assets ........................................ 12,468 16,630 59,267 71,450 93,449
Obligation under capital lease excluding current
portion .......................................... -- -- -- -- 148
Total stockholders' equity .......................... 10,452 12,314 52,909 68,857 87,282

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify forward-looking
statements by the use of the words "believe," "expect," "anticipate," "intend,"
"estimate," "assume" and other similar expressions which predict or indicate
future events and trends and which do not relate to historical matters. You
should not rely on forward-looking statements, because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond our
control. Our actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the risks and uncertainties discussed under the heading "Factors that
May Affect Results of Operations and Financial Condition" on page 10 of this
Form 10-K. You should not place undue reliance on our forward-looking
statements, and we assume no obligation to update any forward-looking
statements.

The following discussion of our financial condition and results of
operations should be read in conjunction with the description of our business
and our financial statements and the notes to those statements included
elsewhere in this Report.

CRITICAL ACCOUNTING POLICIES

While our significant accounting policies are more fully described in
Note 2, Summary of Significant Accounting Policies, to our consolidated
financial statements included in this Report, we believe the following
accounting policies to be critical:

REVENUE RECOGNITION. In accordance with SEC Staff Accounting Bulletin No. 101,
we do not record revenue until all of the following criteria are met: persuasive
evidence of an arrangement exists; services have been rendered; our price to our
customer is fixed and determinable; and collectibility is reasonably assured. We
derive revenue from application fees, transaction fees and professional services
fees. Application fees consist of implementation fees and fixed monthly hosting,
support and operating fees. We record implementation fees as deferred revenue
and recognize these fees as revenue, ratably, over the contract period which
approximates the life of our customer relationship. We recognize fixed monthly
hosting fees as revenue in the month that the service is provided. We recognize
transaction fees as revenue, net of amounts paid to our customers, at the
completion of the listing period. We record certain professional services fees
related to ongoing service relationships as deferred revenue and recognize these
fees as revenue ratably over the remaining contract period. Professional
services fees which represent a separate earnings process and are unrelated to
ongoing services are recognized as revenue in the period the service is
provided.

We follow the guidance of Emerging Issues Task Force issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ("EITF 01-09"), in determining whether consideration,
including equity instruments, given to a customer should be recorded as an
operating expense or a reduction of revenue recognized from that same customer.
Consideration given to a customer is recorded as a reduction of revenue unless
both of the following conditions are met:

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o We receive an identifiable benefit in exchange for the
consideration, and the identified benefit is sufficiently
separable from the customer's purchase of the Company's
products and services such that the Company could have
purchased the products from a third party; and

o We can reasonably estimate the fair value of the benefit
received.

If both of the conditions are met, we record consideration paid to
customers as an expense. Consideration, including equity instruments, not
meeting the above criteria, is recorded as a reduction of revenue to the extent
the Company has recorded cumulative revenue from the customer or reseller. Any
consideration in excess of cumulative revenue recognized from the customer or
reseller is recorded as an operating expense.

Identifying transactions that are within the scope of EITF 01-09,
determining whether those transactions meet the criteria for recognition as an
expense and determining the methodology of cost recognition associated with
these arrangements requires us to make significant judgments. If we reached
different conclusions, reported revenue could be materially different.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND REVENUE RESERVE When estimating our
allowance for doubtful accounts, we analyze our accounts receivable aging,
historical bad debts, customer creditworthiness, current economic trends and
other factors. If collection of accounts receivable is not reasonably assured,
we establish a reserve for any revenue within the current reporting period for
that customer and we charge bad debt expense for any revenue recognized in prior
reporting periods for that customer.

DEFERRED TAX ASSETS We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
consider future taxable income and tax planning strategies in assessing the need
for the valuation allowance, if management were to determine that the Company
would be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the deferred tax asset would effect the
provision for income taxes in the period such determination was made.

UNUTILIZED OFFICE SPACE In the fourth quarter of 2003 and first quarter of
2002, we recorded charges of $160,000 and $4.5 million, respectively, for
unutilized office space at our Woburn, Massachusetts headquarters. This charge
included rent and other related costs for a significant portion of our leased
space which has been vacated for the remaining lease term and the write-down of
related leasehold improvements and furniture and fixtures. In the fourth quarter
of 2002, we recorded a reversal of $513,000 related to a sublease of
approximately 11,000 square feet of the unutilized office space. During 2003, we
charged $1.0 million against this reserve which represented rent payments
related to unutilized office space. During 2002, we charged $746,000 against
this reserve, which represented rent payments related to unutilized office
space. In addition, we recorded $1.2 million for the write-down of leasehold
improvements and furniture and fixtures.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (R), "Accounting for Stock-Based Compensation (Revised)." SFAS No. 123
(R) supersedes APB No. 25 and its related implementation guidance. SFAS No. 123
(R) establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123
(R) focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123 (R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is

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modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of modified award over the
fair value of the original award immediately before the modifications. The
Company has not completed its evaluation of SFAS No. 123 (R) but expects the
adoption of this new standard will have an impact on operating results due to
the Company's use of options as employee incentives.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

For the years ended December 31, 2004, 2003 and 2002, our net loss was $2.0
million, $4.6 million and $22.0 million, respectively. The reduction in net loss
of $2.7 million when comparing 2004 to 2003 was primarily due to the cessation
of its online auction business. The reduction in net loss of $17.4 million when
comparing 2003 to 2002 was primarily due to a decrease in equity related charges
in the a amount of $9.8 million, a decrease in total operating expenses
exclusive of equity related charges of $6.5 million, an increase in total
revenue of $926,000 and a decrease of interest income of $1.1 million.

REVENUE

Total revenue was zero for 2004 compared to $6.7 million in 2003, this
decrease was due to the cessation of the Company's online auction business. The
increase of $1.0 in revenue for 2003 compared to 2002 was due primarily to
service fees incurred under the TSA with eBay offset by the loss of revenue from
customers transferred to eBay as part of the Asset Purchase Agreement. Total
revenue was $5.7 million for 2002.

International revenue was zero in 2004 compared to $1.5 million in 2003
and $1.6 million in 2002. The decrease in 2004 compared with 2003 is due to the
cessation of the Company's online auction business.

OPERATING EXPENSES

COST OF REVENUE

Cost of revenue was zero in 2004, $2.1 million in 2003 and $3.6 million
in 2002. Cost of revenue consists of costs for direct customer support and
support to end-users of our customers' sites, depreciation of network equipment,
fees paid to network providers for bandwidth and monthly fees paid to
third-party network providers. The decrease in 2004 was primarily due to the
cessation of the Company's online auction business. The decreases of $1.5
million in 2003 and $1.3 million in 2002 were primarily due to a reduction in
salaries and related expenses resulting from headcount reductions and a
reduction in the fees paid to network providers for bandwidth. In addition, we
realized cost reductions by relocating our UK Data Center to our US Data Center.

Gross profit was 0.0%, 68.8% and 38.1% of total revenue for 2004, 2003
and 2002, respectively. This decrease in gross profit from 2004 and 2003 was
attributable to the decrease in revenue discussed above. The increase in gross
profit from 2003 to 2002 was primarily attributable to the increase in revenues
from the TSA, while no costs were associated with those revenues.

SALES AND MARKETING

Sales and marketing expenses were zero for 2004, $2.0 million for 2003
and $2.3 million for 2002. The decrease in 2004 is attributable to the cessation
of the Company's online auction business. The decrease in 2003 is attributable
to a reduction in salaries and related expenses.

DEVELOPMENT AND ENGINEERING

Development and engineering expenses were zero for 2004, $1.1 million
for 2003 and $2.2 million for 2002. The decrease for 2004 is attributable to the
cessation of the Company's online auction business. The decreases for 2003 and
2002 were primarily due to a reduction in salaries and related expenses
resulting from lower headcount.

-7-

GENERAL AND ADMINISTRATIVE

General and Administrative expenses were $2.2 million in 2004 compared
to $7.3 million in 2003, a reduction of 72%. Expenses in 2004 were primarily
related to the payment of liability insurance premiums for the prior Board of
$336,000 and the current Board of $90,000 and costs associated with the
settlement of leases in the United States and the United Kingdom. General and
Administrative expenses in 2003 were $7.3 million compared to $6.6 million in
2002 an increase of 10%. Contributing to the increase in 2003 was the payment,
in December of that year, of $830,000 termination pay to all our remaining
employees, together with a patent litigation settlement of $210,000 and an
increase in the premium for directors and officers liability insurance.

UNUTILIZED OFFICE SPACE CHARGE

In the fourth quarter of 2003 and the first quarter of 2002, we
recorded charges of $160,000 and $4.5 million, respectively, for unutilized
office space at our Woburn, Massachusetts headquarters. This charge included
rent and other related costs for a significant portion of our leased space which
has been vacated for the remaining lease term and the write-down of related
leasehold improvements and furniture and fixtures. In the fourth quarter of
2002, we recorded a reversal of $513,000 related to a sublease of approximately
11,000 square feet of the unutilized office space. During 2003, we charged $1.0
million against this reserve which represented rent payments related to
unutilized office space. During 2002, we charged $746,000 against this reserve,
which represented rent payments related to unutilized office space. In addition,
we recorded $1.2 million for the write-down of leasehold improvements and
furniture and fixtures. In 2004, we terminated our lease for this property.

EQUITY-RELATED CHARGES

Equity-related charges consist of the amortization of (1) deferred
stock compensation resulting from the grant of stock options to employees at
exercise prices subsequently deemed to be less than the fair value of the common
stock on the grant date and (2) the fair value of warrants issued to strategic
customers and shares of Series B preferred stock issued to strategic customers
at prices below their fair value.

Deferred stock compensation is being amortized ratably over the vesting
periods of the applicable stock options, typically four years, with 25% vesting
on the first anniversary of the grant date and the balance vesting 6.25%
quarterly thereafter.

At December 31, 2004 and 2003, the Company had no deferred compensation
on the consolidated balance sheets. The Company had recorded $0, $107,000 and
$9.8 million in equity related charges for the years ending December 31, 2004,
2003 and 2002, respectively.

GAIN ON SALE OF ASSETS

On June 20, 2003, the Company entered into an Asset Purchase Agreement
(the "Agreement") with eBay, Inc. ("eBay") to sell substantially all of the
Company's technology and business assets to eBay for $4.5 million in cash. On
September 4, 2003 the Company closed on the sale of assets to eBay.

In connection with the transaction the parties entered into a separate
escrow agreement dated September 2003, which provided that $2 million of the
consideration be held in escrow for a two-year period in order to secure the
Company's indemnification obligations. The Company estimated its potential
liability under the indemnification to be $2 million in accordance with FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45")
and recorded such liability as a reduction in the gain on the sale of assets.

-8-

The Company recorded a gain on the sale of assets of $1,162,000 based
on the proceeds less direct costs of $1,338,000 and the indemnification
liability noted above, which is recorded in the results of operations for the
year ended December 31, 2003.

INTEREST INCOME, NET

Interest income was $265,000, $297,000 and $1.4 million in 2004, 2003
and 2002, respectively. The decrease in interest income for 2004 and 2003 was
due principally to lower average cash, cash equivalents and marketable
securities balances during these periods as a result of cash used in operating
activities and to a lesser extent a decrease in interest rates.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our initial public offering in March 2000, we financed our
operations primarily through private sales of capital stock, the net proceeds of
which totaled $27.1 million as of December 31, 1999. In March 2000, we sold
5,750,000 shares of common stock in our initial public offering. The proceeds to
us from the initial public offering were $89.1 million, net of offering
expenses. At December 31, 2004, cash and cash equivalents totaled $9.0 million.

Net cash used in operating activities was $2.3 million for 2004, $7.1
million for 2003 and $6.3 million for 2002.

Net cash flows from operating activities in 2004 reflect a net loss of
$2.0 million reduced by an increase in other assets of $900,000. Net cash flows
from operating activities reflects increases from unutilized lease costs of $1.2
million, $800,000 from accrued expenses and other miscellaneous increases.

Net cash flows from operating activities in 2003 reflect a net loss of
$4.6 million reduced by depreciation expense of $1.2 million, and a reduction of
accounts receivable of $1.0 million. Net cash flows from operating activities
for 2003 reflects an increase in gain on sale of assets of $1.2 million,
long-term prepayment of $1.6 million, unutilized lease costs of approximately
$880,000 and additional increases of accounts payable, accrued expenses,
deferred revenue and other non-current liabilities.

Net cash flows from operating activities in 2002 reflect a net loss of
$22.0 million reduced by depreciation expense of $2.9 million, non-cash charges
for loss on disposal of property and equipment of $1.4 million, short and
long-term unutilized office space of $2.8 million and amortization of deferred
compensation and equity-related charges of $9.9 million. To a lesser extent, net
cash flows from operating activities for 2002 reflect an increase in accounts
receivable, accrued expenses and deferred revenue, partially offset by a
decrease in prepaid expenses, other current assets and accounts payable.

In 2004, cash provided by investing activities decreased to $5.5
million from $18.1 million in 2003. This decrease was primarily due to the sale
of marketable securities compared to the 2003 activity. During 2003, cash
provided by investing activities was primarily due from the sale of marketable
securities. In 2002, cash provided by investing activities was $20.9 million
primarily from the sale of marketable securities.

In 2004, cash used in financing activities was $22,000, primarily from
the purchase of treasury stock. Cash used in financing activities was $38.3
million in 2003 primarily from a cash distribution paid to shareholders of
record on October 20, 2003. In 2002, cash used in financing activities was $2.2
million primarily from the purchase of 3,181,000 shares of our Common Stock from
the founder of the Company for $4.0 million offset by the issuance of 952,380
shares of our Series B redeemable convertible preferred stock to eBay in May
2002 for net proceeds of $1.8 million as described in Note 11 to the
Consolidated Financial Statements.

We expect to fund our operating expenses for 2005 from available cash.
In addition, we may utilize our cash resources to fund acquisitions or
investments in complementary businesses or technologies, though currently we
have no commitments for capital expenditures or strategic investments. We
believe that our current cash, cash equivalents and marketable securities will
be sufficient to meet our working capital and operating expenditure requirements

-9-

for the near future. Further, we do not have an operating business and
consequently, we are currently exploring various options for the use of our
remaining assets, including pursuit of a business strategy unrelated to our
historical business. Acquisition and/or operation of any future business
strategy may require us to obtain additional financing. In the interim, we
believe our cash needs will primarily relate to costs associated with operating
as a public company, such as legal and accounting costs. If additional financing
is required, we may not be able to raise it on acceptable terms or at all.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS BY THE USE OF THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND,"
"ESTIMATE," "ASSUME" AND OTHER SIMILAR EXPRESSIONS WHICH PREDICT OR INDICATE
FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS. YOU
SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS, BECAUSE THEY INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS.

SOME OF THE FACTORS THAT MIGHT CAUSE THESE DIFFERENCES INCLUDE THOSE
SET FORTH BELOW. YOU SHOULD CAREFULLY REVIEW ALL OF THESE FACTORS, AND YOU
SHOULD BE AWARE THAT THERE MAY BE OTHER FACTORS THAT COULD CAUSE THESE
DIFFERENCES. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON INFORMATION, PLANS
AND ESTIMATES AT THE DATE OF THIS FORM 10-K, AND WE DO NOT PROMISE TO UPDATE ANY
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN UNDERLYING ASSUMPTIONS OR
FACTORS, NEW INFORMATION, FUTURE EVENTS OR OTHER CHANGES.

WE CURRENTLY DO NOT HAVE AN OPERATING BUSINESS, BUT ALSO DO NOT INTEND TO PURSUE
A COURSE OF COMPLETE LIQUIDATION AND DISSOLUTION, AND ACCORDINGLY, THE VALUE OF
YOUR SHARES MAY DECREASE

We currently do not have any operating business; we are considering various
options for the use of our remaining assets, but have yet to approve any
definitive plans. In the meantime, we will continue to incur operating expenses
while we consider alternative operating plans. These plans may include business
combinations with or investments in other operating companies, or entering into
a completely new line of business. We have not yet identified any such
opportunities, and thus, you will not be able to evaluate the impact of such a
business strategy on the value of your stock. In addition, we cannot assure you
that we will be able to identify any appropriate business opportunities. Even if
we are able to identify business opportunities that our Board deems appropriate,
we cannot assure you that such a strategy will provide you with a positive
return on your investment, and it may in fact result in a substantial decrease
in the value of your stock. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares. Furthermore, we
currently do not intend to pursue a course of complete liquidation and
dissolution. As a result, you should not expect any further cash distributions.

WE MAY NOT BE ABLE TO IDENTIFY OR FULLY CAPITALIZE ON ANY APPROPRIATE BUSINESS
OPPORTUNITIES

We are considering various options for the use of our remaining assets, which
may include business combinations with or investments in other operating
companies, or entering into a completely new line of business. Nevertheless, we
have not yet identified any appropriate business opportunities, and, due to a
variety of factors outside of our control, we may not be able to identify or
fully capitalize on any such opportunities. These factors include: (1)
competition from other potential acquirers and partners of and investors in
potential acquisitions, many of whom may have greater financial resources than
we do; (2) in specific cases, failure to agree on the terms of a potential
acquisition, such as the amount or price of our acquired interest, or
incompatibility between us and management of the company we wish to acquire; and
(3) the possibility that we may lack sufficient capital and/or expertise to
develop promising opportunities. Even if we are able to identify business
opportunities that our Board deems appropriate, we cannot assure you that such a
strategy will provide you with a positive return on your investment, and may in
fact result in a substantial decrease in the value of your stock. In addition,
if we enter into a combination with a business that has operating income, we
cannot assure you that we will be able to utilize all or even a portion of our
existing net operating loss carryover for federal or state tax purposes
following such a business combination. If we are unable to make use of our
existing net operating loss carryover, the tax advantages of such a combination
may be limited, which could negatively impact the price of our stock and the
value of your investment. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares.

-10-

STOCKHOLDERS MAY BE LIABLE TO OUR CREDITORS FOR UP TO AMOUNTS RECEIVED FROM US
IF OUR RESERVES ARE INADEQUATE

If we pursue a plan of complete liquidation and dissolution, a Certificate of
Dissolution will be filed with the State of Delaware after such plan is approved
by our stockholders. Pursuant to the Delaware General Corporation Law, we will
continue to exist for three years after the dissolution becomes effective or for
such longer period as the Delaware Court of Chancery shall direct, for the
purpose of prosecuting and defending suits against us and enabling us gradually
to close our business, to dispose of our property, to discharge our liabilities
and to distribute to our stockholders any remaining assets. Under the Delaware
General Corporation Law, in the event we fail to create an adequate contingency
reserve for payment of our expenses and liabilities during this three-year
period, each stockholder could be held liable for payment to our creditors for
such stockholder's pro rata share of amounts owed to creditors in excess of the
contingency reserve. The liability of any stockholder would be limited, however,
to the amounts previously received by such stockholder from us (and from any
liquidating trust or trusts), including the cash distribution of $1.30 per share
paid to stockholders on November 3, 2003. Accordingly, in such event a
stockholder could be required to return all distributions previously made to
such stockholder. In such event, a stockholder could receive nothing from us
under a plan of complete liquidation and dissolution. Moreover, in the event a
stockholder has paid taxes on amounts previously received, a repayment of all or
a portion of such amount could result in a stockholder incurring a net tax cost
if the stockholder's repayment of an amount previously distributed does not
cause a commensurate reduction in taxes payable. There can be no assurance that
the contingency reserve maintained by us will be adequate to cover any expenses
and liabilities.

OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET, AND IS THEREFORE
SIGNIFICANTLY LESS LIQUID THAN BEFORE

Our stock has been delisted from trading on The Nasdaq National Market by reason
of not maintaining listing requirements due to, among other things,
significantly reduced market price of our common stock. As a result, our common
stock currently trades over the counter on the Nasdaq OTC Bulletin Board and the
ability of our stockholders to obtain liquidity and fair market prices for our
shares has been significantly impaired.

WE WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING
AND OTHER REQUIREMENTS

We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended, and other
applicable requirements including those under the Sarbanes-Oxley Act of 2002
even though compliance with such requirements is economically burdensome. In
order to curtail expenses, if we elect to pursue a liquidation and dissolution
strategy, after we file our Certificate of Dissolution, we will seek relief from
the Securities and Exchange Commission from the reporting requirements under the
Exchange Act, which may or may not be granted. Until such relief is granted we
will continue to make obligatory Exchange Act filings. We anticipate that even
if such relief is granted in the future, we will continue to file current
reports on Form 8-K to disclose material events relating to our liquidation and
dissolution along with any other reports that the Securities and Exchange
Commission may require.

WE FACE AND MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT MIGHT BE
COSTLY TO RESOLVE

From time to time, we have received letters from corporations and other entities
suggesting that we review patents to which they claim rights or claiming that we
infringe on their intellectual property rights. Such claims may result in our
being involved in litigation. Although we sold our operating assets to eBay, we
still have exposure for liabilities relating to our business operations prior to
the sale. Further, we cannot assure you that third parties will not assert
claims in the future or that we will prevail against any such claims. We could
incur substantial costs to defend any claims relating to proprietary rights,
which would deplete our remaining cash assets. In addition, we are obligated
under certain agreements to indemnify the other party for claims that we
infringe on the proprietary rights of third parties. If we are required to
indemnify parties under these agreements, our remaining assets could be
substantially reduced. If someone asserts a claim against us relating to
proprietary technology or information, we might seek settlement of such claim.
We might not be able to agree to a settlement on reasonable terms, or at all.
The failure to obtain a settlement on acceptable terms would decrease cash for
other purposes.

-11-

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INVESTMENT PORTFOLIO

None

FOREIGN CURRENCY RISK

None

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements are included in this
Report beginning at page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our
independent accountants and engaged Rothstein, Kass & Company, P.C. as our
independent auditors for the year ended December 31, 2003. We filed a current
report on Form 8-K with the Securities and Exchange Commission with respect to
this matter.

ITEM 9A. CONTROLS AND PROCEDURES

As required by Rule 13a-15(b) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report, we carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. In designing and evaluating our disclosure controls and procedures,
we recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply its judgment in
evaluating and implementing possible controls and procedures. The effectiveness
of our disclosure controls and procedures is necessarily limited by the staff
and other resources available to us. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There was no change
in our internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. In connection
with these rules, we will continue to review and document our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that our systems evolve with our business.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item regarding directors and executive
officers is incorporated by reference from the discussion in the proxy statement
for the 2005 Annual Meeting of Shareholders under the headings "Directors" and
"Other Information."

-12-

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) INDEX TO FINANCIAL STAEMENTS

The following documents are included as part of this Annual Report on
Form 10-K.

PAGE
----

Report of Independent Registered Public Accounting Firm............................................... F-2
Report of Independent Registered Public Accounting Firm............................................... F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003.......................................... F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002............ F-5
Consolidated Statements of Convertible Preferred Stock, Stockholders' Equity (Deficit) and
Comprehensive Loss for the years ended December 31, 2004, 2003 and 2002............................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002............ F-8
Notes to Consolidated Financial Statements............................................................ F-9

(a)(2) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts......................................................... II-1

(a)(3) Exhibits

Please see subsection (b) below

(b) EXHIBITS

The following exhibits are incorporated herein by reference or are filed
with this report as indicated below. Exhibits indicated with (+) constitute all
of the management contracts and compensation plans and arrangements required to
be filed as exhibits to the Report on Form 10-K.

-13-

EXHIBIT NO. TITLE
----------- -----

3.1 Form of Fifth Amended and Restated Certificate of
Incorporation of the Company(1)
3.2 Composite Amended and Restated Bylaws of the Company as
amended by Amendment to Bylaws adopted May 16, 2001*
4.1 Form of Specimen Certificate for the Company's Common Stock(4)
4.2 Shareholder Rights Agreement, dated as of May 17, 2001,
between the Company and EquiServe Trust Company, N.A., as
Rights Agent, including form of Right Certificate(2)
10.1 Form of Indemnity Agreement entered into by the Company with
each of its directors(1)
10.2 Amended and Restated 1997 Stock Option Plan(1)
10.3 October 2001 Amendment to Amended and Restated 1997 Stock
Option Plan(4)
10.4 1999 Stock Option Plan(1)
10.5 2000 Stock Option and Incentive Plan(1)
10.6 Composite Transaction Bonus Plan adopted August 28, 2001 as
amended on March 12, 2002(4)
10.7 Employee Stock Purchase Plan(1)
10.8 Letter agreement dated June 26, 2001 between the Company and
Nanda Krish(3)
10.9 Amended and Restated Agreement Concerning Termination of
Employment, Severance Pay and Related Matters dated as of
October 11, 2001 between the Company and Mathew Ackley(4)
10.10 Second Amended and Restated Agreement Concerning Termination
of Employment, Severance Pay and Related Matters dated as of
October 11, 2001 between the Company and Janet Smith(4)
10.11 Lease Agreement dated November 9, 1999, between DIV Unicorn,
LLC and the Company(1)
10.12 Siteharbor Services Agreement between the Company and
NaviSite, Inc. dated as of November 1, 2001 together with
Amendment to Siteharbor Services Agreement dated as of
November 1, 2001(4)
10.13 Indemnification Agreement among the Company and Sierra
Ventures VII, LP, and Sierra Ventures Associates VII, LLC,
dated February 25, 1999(1)
10.14 Warrant to Purchase Common Stock between the Company and
Lycos, Inc. dated as of May 12, 1999(1)
10.15 Auction Services Agreement, dated September 15, 1999, by and
between the Company and Ticketmaster Online-CitySearch(1)
10.16 Agreement Concerning termination of Employment, Severance Pay
and related Matters dated as of January 17, 2002 between the
Company and Nanda Krish(5)
10.17 Second Amendment to Agreement dated as of March 15, 2002
between the Company and NaviSite, Inc.(5)
10.18 Promotions Agreement dated as of April 10, 2002 between the
Company and eBay Inc.(7)
10.19 Third Amendment to Agreement dated as of December 1, 2002
between the Company and Navisite, Inc.*
10.20 Agreement Concerning Employment and Termination dated as of
January 20, 2003 between the Company and David George. *
10.80 Services Agreement dated as of November 17, 2004 between the
Company and Barington Capital Group, L.P.*
21 List of Subsidiaries*
23.1 Consent of Rothstein, Kass & Company, P.C.*
23.2 Consent of PricewaterhouseCoopers LLP*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

-14-

------------

* Filed with this Report.

(1) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Registration Statement on Form S-1 (No. 333-92677),
as amended, filed with the SEC.

(2) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Current Report on Form 8-K dated May 17, 2001 filed
with the SEC on May 22, 2001.

(3) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 filed with the SEC on November 9, 2001.

(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the SEC on March 31, 2002.

(5) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 filed with the SEC on May 14, 2002.

(6) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Report on Form 8-K filed with the SEC on May 20,
2002.

(7) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 filed with the SEC on August 14, 2002.

Please see page II-1 of this Annual Report on form 10-K.

-15-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 30, 2005.

DYNABAZAAR, INC.

By: /s/ William J. Fox
-------------------------------------
William J. Fox
President and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ William J. Fox President, Chief Executive Officer and Director March 30, 2005
-------------------------- (Principal Executive Officer)
William J. Fox

/s/ Melvyn Brunt Chief Financial Officer and Treasurer March 30, 2005
-------------------------- (Principal Financial and Accounting Officer)
Melvyn Brunt

/s/ Rory J. Cowan Director and Chairman of the Board March 30, 2005
--------------------------
Rory J. Cowan

/s/ Lloyd I. Miller, III Director March 30, 2005
--------------------------
Lloyd I. Miller, III

/s/ James A. Mitarotonda Director March 30, 2005
--------------------------
James A. Mitarotonda

/s/ Karen Schneider Director March 30, 2005
--------------------------
Karen Schneider

/s/ Raymond Steele Director March 30, 2005
--------------------------
Raymond Steele

-16-

DYNABAZAAR, INC.
CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

PAGE
----

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Dynabazaar, Inc.

We have audited the accompanying consolidated balance sheets of Dynabazaar, Inc.
& Subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of operations, consolidated statements of convertible
preferred stock, stockholders' equity (deficit) and comprehensive loss, and
consolidated cash flows for each of the two years in the period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.

In connection with our audit of the consolidated financial statements referred
to above, we audited the financial schedules listed under Item 15. In our
opinion, these financial schedules, when considered in relation to the
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information stated therein.

/s/ Rothstein, Kass & Company, P.C.

Roseland, New Jersey
March 9, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Dynabazaar, Inc.:

In our opinion, the consolidated statements of operations, of cash
flows and of changes in convertible preferred stock, stockholders' equity
(deficit) and comprehensive loss for the years ended December 31, 2002 and 2001
present fairly, in all material respects, the results of operations and cash
flows of Dynabazaar, Inc. and its subsidiaries for the years ended December 31,
2002 and 2001, in conformity with accounting priciples generally generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 7, 2003

F-3

DYNABAZAAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

DECEMBER 31,
------------
2004 2003
---- ----

ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 8,989 $ 5,697
Restricted cash ................................................................ -- 523
Accounts receivable, net of allowance of zero and $162 at December 31, 2004
and 2003, respectively ...................................................... -- 351
Prepaid expenses ............................................................... 331 389
Other current assets (see Note 5 and 8) ........................................ 2,000 903
--------------------------------
Total current assets ....................................................... 11,320 7,863
Long-term marketable securities ................................................... -- 5,000

Long-term prepaid expenses ........................................................ 1,328 1,658
Property and equipment, net ....................................................... -- 109
Other assets (see Note 8) ......................................................... -- 2,000
--------------------------------
Total assets ............................................................... $ 12,648 $ 16,630
================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ -- $ 82
Accrued expenses ............................................................... 196 1,034
Current portion of unutilized space accrual .................................... -- 1,200
Other current liabilities (see Note 8) ......................................... 2,000 --
--------------------------------
Total current liabilities .................................................. 2,196 2,316
Other long-term liabilities (see Note 8) .......................................... -- 2,000
--------------------------------
Total liabilities .......................................................... 2,196 4,316
--------------------------------

Commitments and contingencies

Stockholders' equity

Common stock, $0.001 par value; 90,000,000 shares authorized, 29,426,385
shares issued at December 31, 2004 and 2003 ................................. 30 30
Additional paid-in capital ..................................................... 151,636 151,636
Treasury stock, (at cost); 2,458,441 and 2,376,641 shares at December 31,
2004 and 2003, respectively ................................................. (3,040) (3,018)
Accumulated other comprehensive income, net .................................... 313 191
Accumulated deficit ............................................................ (138,487) (136,525)
--------------------------------
Total stockholders' equity ................................................. 10,452 12,314
--------------------------------
Total liabilities and stockholders' equity ................................. $ 12,648 $ 16,630
================================

The accompanying notes are an integral part of the consolidated financial statements.

F-4

DYNABAZAAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
---- ---- ----

Revenue ..................................................................... $ -- $ 6,673 $ 5,747
Operating expenses:
Cost of revenue, exclusive of zero, $11, and $134 in 2004, 2003
and 2002, respectively, reported below as equity-related charges -- 2,085 3,555
Sales and marketing, exclusive of zero, $41, and $9,465 in 2004,
2003 and 2002, respectively, reported below as equity-related
charges ............................................................... -- 1,978 2,284
Development and engineering, exclusive of zero, $32, and $195 in
2004, 2003 and 2002, respectively, reported below as
equity-related charges ................................................ -- 1,118 2,213
General and administrative, exclusive of zero, $23, and $100 in
2004, 2003 and 2002, respectively, reported below as
equity-related charges ................................................ 2,227 7,304 6,612
Restructuring charges .................................................... -- -- 530
Unutilized office space charge ........................................... -- 160 3,987
Equity-related charges ................................................... -- 107 9,894
-------------------------------------
Total operating expenses .................................................... 2,227 12,752 29,075
-------------------------------------

Loss from operations ........................................................ (2,227) (6,079) (23,328)
Interest income ............................................................. 265 297 1,351
Gain on sale of assets ...................................................... -- 1,183 --
-------------------------------------
Net loss .................................................................... (1,962) (4,599) (21,977)

Dividends and accretion on redeemable convertible preferred stock ........... -- 123 138
-------------------------------------
Net loss attributable to common shareholders ................................ $ (1,962) $ (4,722) $(22,115)
=====================================

Basic and diluted net loss per common share ................................. $ (0.07) $ (0.18) $ (0.79)
=====================================

Shares used to compute basic and diluted net loss per common share .......... 27,024 26,796 28,080
=====================================

The accompanying notes are an integral part of the consolidated financial statements.

F-5

DYNABAZAAR, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)

ADDITIONAL
AMOUNT PAID-IN
SHARES AMOUNT SHARES AT PAR CAPITAL SHARES AMOUNT
------ ------ ------ ------ ------- ------ ------
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------- ------------ --------------

January 1, 2002 .................... -- $ -- 29,062 $ 29 $ 189,370 -- $ --
Comprehensive loss:
Net loss ........................... -- -- -- -- -- -- --
Foreign currency translation
adjustment ...................... -- -- -- -- -- -- --
Unrealized loss on marketable
securities ...................... -- -- -- -- -- -- --

Comprehensive loss .................

Issuance of Series B
convertible preferred stock ..... 952 1,796 -- -- -- -- --
Effective EITF 01-09 on
convertible preferred stock ..... -- 114 -- -- -- -- --
Series B convertible preferred
stock dividend .................. -- -- -- -- (81) -- --
Series B convertible preferred
stock accretion ................. -- 57 -- -- (57) -- --
Repurchase of common stock ......... -- -- -- -- -- 3,181 (4,039)
Issuance of common stock upon
exercise of employee stock
options ......................... -- -- 320 1 10 (192) 244
Issuance of common stock under
the employee stock purchase
plan ............................ -- -- 39 -- 32 -- --
Cancellation of employee stock
options ......................... -- -- -- -- (527) -- --
Equity-related charges ............. -- -- -- -- -- -- --
Deferred compensation related
to employee stock options ....... -- -- -- -- -- -- --

------------------------------------------------------------------------------------
Balance at December 31, 2002 ....... 952 1,967 29,421 30 188,747 2,989 (3,795)
------------------------------------------------------------------------------------

Comprehensive loss:
Net loss ........................... -- -- -- -- -- -- --
Foreign currency translation
adjustment ...................... -- -- -- -- -- -- --
Unrealized gain on marketable
securities ...................... -- -- -- -- -- -- --

Comprehensive loss .................
Series B convertible preferred
stock accretion ................. -- 33 -- -- (33) -- --
Series B convertible preferred
stock dividend .................. -- -- -- -- (90) -- --
Issuance of common stock upon
exercise of employee stock
options ......................... -- -- -- -- (352) (612) 777

(CONTINUED ON NEXT PAGE)

The accompanying notes are an integral part of the consolidated financial statements.

F-6a

DYNABAZAAR, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)

ACCUMULATED
DEFERRED OTHER
COMPENSATION COMPRE- TOTAL
AND HENSIVE COMPRE- STOCKHOLDERS'
EQUITY-RELATED INCOME ACCUMULATED HENSIVE EQUITY
CHARGES (LOSS) DEFICIT LOSS (DEFICIT)
------- ------ ------- ---- ---------

January 1, 2002 .................... $ (10,580) $ (13) $(109,949) -- $ 68,857
Comprehensive loss:
Net loss ........................... -- -- (21,977) $ (21,977) (21,977)
Foreign currency translation
adjustment ...................... -- 98 -- 98 98
Unrealized loss on marketable
securities ...................... -- (73) -- (73) (73)
----------
Comprehensive loss ................. (21,952)

Issuance of Series B
convertible preferred stock ..... -- -- -- -- --
Effective EITF 01-09 on
convertible preferred stock ..... -- -- -- -- --
Series B convertible preferred
stock dividend .................. -- -- -- -- (81)
Series B convertible preferred
stock accretion ................. -- -- -- -- (57)
Repurchase of common stock ......... -- -- -- -- (4,039)
Issuance of common stock upon
exercise of employee stock
options ......................... -- -- -- -- 255
Issuance of common stock under
the employee stock purchase
plan ............................ -- -- -- -- 32
Cancellation of employee stock
options ......................... 527 -- -- -- --
Equity-related charges ............. 9,414 -- -- -- 9,414
Deferred compensation related
to employee stock options ....... 480 -- -- -- 480

--------------------------------------------------------------------
Balance at December 31, 2002 ....... (159) 12 (131,926) -- 52,909
--------------------------------------------------------------------

Comprehensive loss:
Net loss ........................... -- -- (4,599) (4,599) (4,599)
Foreign currency translation
adjustment ...................... -- 122 -- 122 122
Unrealized gain on marketable
securities ...................... -- 57 -- 57 57
----------
Comprehensive loss ................. (4,420)
Series B convertible preferred
stock accretion ................. -- -- -- -- (33)
Series B convertible preferred
stock dividend .................. -- -- -- -- (90)
Issuance of common stock upon
exercise of employee stock
options ......................... -- -- -- -- 425

The accompanying notes are an integral part of the consolidated financial statements.

F-6b

Issuance of common stock under
employee stock purchase plan ...... -- -- 6 -- 6 -- --
Cancellation of employee stock
options ........................... -- -- -- -- (52) -- --
Deferred compensation related
to employee stock options ......... -- -- -- -- -- -- 107

Reversal of Series B preferred
expenses .......................... -- -- -- -- (42) -- --
Series B liquidation preference ...... -- -- -- -- (2,000) -- --
Series B redemption and
retirement ........................ (952) (2,000) -- -- 533 -- --
Dividend payment ..................... -- -- -- -- (35,165) -- --

---------------------------------------------------------------------------------
Balance at December 31, 2003 ......... -- -- 29,427 30 151,636 2,377 (3,018)
---------------------------------------------------------------------------------

Comprehensive loss:
Net loss ............................. -- -- -- -- -- -- --
Foreign currency translation
adjustment ........................ -- -- -- -- -- -- --

Comprehensive loss ...................
Treasury stock purchase
(at cost) ......................... -- -- -- -- -- 81 (22)

---------------------------------------------------------------------------------
Balance at December 31, 2004 ......... -- $ -- 29,427 $ 30 $ 151,636 2,458 $ (3,040)
=================================================================================

(CONTINUED BELOW)

Issuance of common stock under
employee stock purchase plan ...... -- -- -- -- 6
Cancellation of employee stock
options ........................... 52 -- -- -- --
Deferred compensation related
to employee stock options ......... 107 -- -- -- --

Reversal of Series B preferred
expenses .......................... -- -- -- -- 42
Series B liquidation preference ...... -- -- -- -- (2,000)
Series B redemption and
retirement ........................ -- -- -- -- 533
Dividend payment ..................... -- -- -- -- (35,165)

----------------------------------------------------------------
Balance at December 31, 2003 ......... -- 191 136,525 -- 12,314
----------------------------------------------------------------

Comprehensive loss:
Net loss ............................. -- -- (1,962) (1,962) (1,962)
Foreign currency translation
adjustment ........................ -- 122 -- 122 122
----------
Comprehensive loss ................... (1,840)
Treasury stock purchase
(at cost) ......................... -- -- -- -- (22)

----------------------------------------------------------------
Balance at December 31, 2004 ......... -- $ 313 $(138,467) -- $ 10,452
================================================================

The accompanying notes are an integral part of the consolidated financial statements.

F-7

DYNABAZAAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
---- ---- ----

Cash flows from operating activities:
Net loss .......................................................................... $ (1,962) $ (4,599) $ (21,977)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of assets ......................................................... -- (1,183) --
Depreciation ................................................................... 109 1,160 2,940
Provision for bad debt ......................................................... 144 2 (177)
Amortization of deferred compensation and equity-related charges ............... -- 107 9,894
Loss on disposal of property and equipment ..................................... -- 279 1,379
Redeemable convertible preferred stock issued to customer ...................... -- -- 114
Changes in operating assets and liabilities:
Accounts receivable .......................................................... 207 975 (512)
Prepaid expenses and other current assets .................................... 58 (148) 96
Long-term prepaid expenses ................................................... 330 (1,623) --
Other assets ................................................................. 903 -- --
Accounts payable ............................................................. (82) (51) (250)
Accrued expenses ............................................................. (838) (455) --
Deferred revenue ............................................................. -- (520) 282
Accrual for unutilized office space .......................................... (1,200) (880) 2,080
Other non-current liabilities ................................................ -- (169) (169)
----------------------------------------
Net cash used in operating activities ............................................. (2,331) (7,105) (6,300)
----------------------------------------
Cash flows from investing activities:
Proceeds from sale of assets, net of selling costs ............................. -- 1,183 --
Long term prepaid .............................................................. -- -- (35)
Additions to property and equipment ............................................ -- (70) (17)
Purchase of marketable securities .............................................. -- (189,448) (304,522)
Proceeds from maturity of marketable securities ................................ 5,000 206,439 325,502
(Increase) decrease in restricted cash ......................................... 523 25 (67)
----------------------------------------
Net cash provided by investing activities ......................................... 5,523 18,129 20,861
----------------------------------------
Cash flows from financing activities:
Repayment of capital lease obligation .......................................... -- -- (145)
Proceeds from issuance of common stock, net of issuance costs .................. -- 431 287
Proceeds from issuance of Series B convertible preferred stock, net of
issuance costs .............................................................. -- -- 1,796
Payment of liquidation preference of Series B convertible preferred stock ...... -- (2,000) --
Payment of redemption of convertible preferred stock ........................... -- (1,467) --
Purchase of treasury stock ..................................................... (22) -- (4,039)
Dividends paid on preferred stock .............................................. -- (90) (81)
Dividends paid on common stock ................................................. -- (35,165) --
----------------------------------------
Net cash used in financing activities ............................................. (22) (38,291) (2,182)
----------------------------------------
Effect of foreign exchange rates on cash and cash equivalents ..................... 122 221 35
Net increase (decrease) in cash and cash equivalents .............................. 3,292 (27,046) 12,414
Cash and cash equivalents, beginning of period .................................... 5,697 32,743 20,329
----------------------------------------
Cash and cash equivalents, end of period .......................................... $ 8,989 $ 5,697 $ 32,743
========================================

The accompanying notes are an integral part of the consolidated financial statements.

F-8

DYNABAZAAR, INC.
Notes to Consolidated Financial Statements

1. THE COMPANY

Through September 3, 2003, Dynabazaar, Inc. ("we," "us, " "Dynabazaar" or the
"Company") was an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and retail buyers. On September 4, 2003, we sold substantially all
of our operating assets to eBay, Inc. (eBay") for consideration of $4.5 million
in cash under the terms and conditions of an asset purchase agreement we entered
into with eBay on June 20, 2003. Following the closing of the asset sale, we
changed our name from "Fairmarket, Inc." to "Dynabazaar, Inc."

In January 2004, James Mitarotonda was appointed as our President and Chief
Executive Officer and Mel Brunt was appointed as our Chief Financial Officer. In
December 2004, Mr. Mitarotonda resigned as the Company's President and Chief
Executive Officer and remained a director of the Company. In December 2004, Mr.
William Fox became the Company's President and Chief Executive Officer.

In connection with Company's cessation of its online auction business, effective
as of January 1, 2004, the Company relocated its principal executive offices to
888 Seventh Avenue, 17th Floor, New York, 10019, an office maintained by
Barington Capital Group, LP ("Barington), a limited partnership whose general
partner is a corporation of which James Mitarotonda is Chairman, President and
Chief Executive Officer. Mr. Mitarotonda is a director of the Company and our
former President and Chief Executive Officer. William Fox, the President, Chief
Exceutive Officer and a director of the Company, is the Vice Chairman of
Barington. We paid Barington a monthly fee of $8,000 for performing certain
administrative services on behalf of the Company. In connection with the
agreement, we granted to James Mitarotonda an option to purchase up to 320,000
shares of our common stock. The option is fully excercisable and was granted
with an exercise price per share equal to $0.33, the fair market value of our
common stock on the grant date.

On January 20, 2004, the Company executed a settlement agreement with Acquaport
Unicorn, Inc., the landlord of the Company's Woburn, Massachusetts headquarters,
providing for termination of the Company's lease in consideration of a cash
payment of $1.2 million. In March 2004 the cash payment was made and on April
9th, 2004 our last employee was terminated and the premises vacated.

On June 15, 2004, we received a letter from the Nasdaq Stock Market notifying us
that, because the closing price of our common stock has closed below $1.00 per
share for 30 consecutive trading days and we do not presently conduct an
operating business, the Company's common stock would be delisted on June 24,
2004. Our stock now trades over the counter on the Nasdaq OTC bulletin board.

On June 22, 2004, the Board of Directors of the Company authorized the
termination of the Company's Shareholder Rights Agreement based on its
assessment that the termination of the Rights Agreement would benefit the
Company's stockholders and enhance the corporate governance practice of the
Company. The Company entered into an Amendment No 1 to the Shareholder Rights
Agreement, dated as of July 7, 2004, by and between the Company and EquiServe
Trust Company, N.A., as Rights Agent, which provided for the termination of the
Company's Shareholder Rights Agreement on July 31, 2004.

On August 20, 2004, the Company announced that the Board of Directors had
authorized the repurchase of up to 5 million shares of the Corporation common
stock. To date, we have purchased 81,800 shares at an average price per share of
$ 0.2689.

F-9

As of September 30, 2004, we held an available-for-sale security in the form of
a United States Government Bond. On October 6, 2004, this position was
liquidated and re-invested in cash.

At the December 17, 2004 Board of Directors meeting, the Board unanimously
approved a revision to the Administrative Services Agreement entered into with
Barington Capital Group, LP (Barington) in December 2003. The revision includes
an increase in the monthly fee payable to Barington for performing certain
services on behalf of the Company from $8,000 to $15,000.

We are currently reviewing alternatives for the use of our remaining assets,
which may include other business opportunities unrelated to our historical
business, including the possible acquisition of other businesses. At this time,
our board of directors has not made any decision to pursue any one of these
options and has not identified any such opportunities. We cannot assure you that
we will be able to identify or successfully capitalize on any appropriate
business opportunities.

The Company has not yet settled on an operating plan, although the Company feels
its existing cash and cash equivalents are sufficient to fund the Company's
current operations and satisfy its obligations. The Company believes these
obligations will primarily relate to costs associated with the operation as a
public company (legal, accounting, insurance, etc.), as well as the satisfaction
of any potential legal judgments or settlements and the expenses associated with
any new business activities which may be undertaken by the Company. The Company
continues to consider future alternatives, including the possible acquisition of
other businesses. However, the Company has not consummated any significant
transactions to date and the Company's business prospects remain uncertain. To
the extent that management of the Company moves forward on any alternative
strategy, such strategy may have an impact on the Company's liquidity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts
of Dynabazaar and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated. Certain reclassifications of prior year
amounts have been made to conform with current year presentation.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ materially from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents consist of cash placed in an overnight investment
account, commercial paper and money market accounts. The Company maintains cash
balances in certain financial institutions that may exceed the Federal Deposit
Insurance Corporation coverage of $100,000. At December 31, 2004, and at various
times during the year, balances of cash at financial institutions exceeded the
federally insured limit. The Company has not experienced any losses in such
accounts and believes it is not subject to any significant credit risk on cash
and cash equivalents.

RISKS AND UNCERTAINTIES

The Company has no significant concentration of credit risk such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and cash equivalents,
marketable securities and trade accounts receivable. The Company places its
cash, cash equivalents and marketable securities with what the Company believes
are high credit quality financial institutions.

F-10

CUSTOMERS

Our customers included traditional retailers, distributors and
manufacturers as well as Internet portals and other web communities primarily
engaged in e-commerce. In 2003, we had two major customers that each accounted
for more than 10% of our revenue. eBay, Inc. accounted for 38% and Microsoft
Corporation accounted for 11% of total revenue. In 2002, we had three customers
that each accounted for more than 10% of our total revenue. Sam's West, Inc.
accounted for 13.6%, eBay, Inc. accounted for 13.1% and Microsoft Corporation
accounted for 12.6% of total revenue. In November 2002, our contract with eBay,
Inc. related to the Burger King promotion program was terminated.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost less accumulated
depreciation. Costs of major additions and betterments are capitalized;
maintenance and repairs that do not improve or extend the life of the respective
assets are charged to operations. On disposal, the related accumulated
depreciation or amortization is removed from the accounts and any resulting gain
or loss is included in results of operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:

ESTIMATED USEFUL LIFE
---------------------

Computer equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of lease term or asset useful life

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events, such as
service discontinuance, technological obsolescence, facility closure or other
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. When such events occur, the Company compares the carrying amount
of the assets to their undiscounted expected future cash flows. If this
comparison indicates that there is an impairment, the amount of the impairment
is calculated using expected, discounted cash flows using the Company's weighted
average cost of capital.

REVENUE RECOGNITION

Prior to the eBay, Inc. sale, the Company derived revenues from
application fees, transaction fees and professional services fees. In accordance
with SEC Staff Accounting Bulletin No. 101, the Company did not record revenue
until all of the following criteria are met: persuasive evidence of an
arrangement exists; services have been rendered; the Company's price to its
customer is fixed and determinable; and collectibility is reasonably assured.

Application fees consisted of implementation fees and fixed monthly
hosting, support and operating fees. An implementation fee was generally charged
for the initial design, development and implementation of a customer's dynamic
pricing or points based site or the Company's MarketSelect service, in
accordance with the terms of the contract. The implementation fee was generally
payable upon execution of the contract, recorded as deferred revenue and
recognized as revenue, ratably, over the contract period. A fixed monthly
hosting fee covered hosting services, direct customer support services, end-user
customer support services, services for online billing and collection of fees
for community sites, and other monthly operating services provided by the
Company. Fixed monthly service fees were recognized as revenue in the month that
the service is provided.

Merchant customers generally paid transaction fees at varying
percentages of the gross proceeds from the sale of their listed products and
services, whether sold on their sites or on other Dynabazaar Network sites or,
in the case of the Company's MarketSelect service, on the eBay site. For
community customers, transaction fees consisted of the Company's share of
listing fees charged by community customers for the listing of products and

F-11

services, enhanced listing fees charged by community customers for the prominent
display of a particular seller listing and success fees charged to sellers upon
a completed sale of a listing. Community customers paid transaction fees
calculated in one of two ways. Generally, under contracts entered into before
2000, these fees were calculated based on a percentage of the gross proceeds
from the sale of the items that were listed through the community site and sold
either on the community site or on other Dynabazaar Network sites. These
communities received a percentage of the gross proceeds from the sale of items
that were listed directly on other sites in the Dynabazaar Network and sold
through the community site. Contracts entered into starting in early 2000
generally provided for payment by the community customer of transaction fees
with respect to the sale of listings that were placed on the community site that
were calculated as a percentage of the transaction fee that the community site
charged to its end-users; similarly, for listings that are listed directly
through other sites in the Dynabazaar Network and sold through the community
site, the community site received from the Company a percentage of the success
fee that the listing site charged to the listing site's end-user when the
listing sells. The Company recorded transaction revenue net of amounts paid to
its customers as described above. Transaction fees were invoiced and recognized
as revenue at the completion of the listing period.

Professional services fees primarily consisted of fees for consulting
services provided by the Company related to the Company's outsourced,
private-label, dynamic pricing solutions, including business applications,
technical customization, integration, e-marketing, usability and other
consulting services. Certain professional services fees, including technical
customization and integration related to ongoing service relationships, were
billed over the term of the service, recorded as deferred revenue and recognized
as revenue, ratably, over the remaining term of the service contract. Fees for
consulting services, which represent a separate earnings process and are
unrelated to ongoing services, including business applications, e-marketing,
usability and other consulting services, were generally billed and recognized as
revenue in the period the service was provided.

We follow the guidance of Emerging Issues Task Force issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ("EITF 01-09") in determining whether consideration,
including equity instruments, given to a customer should be recorded as an
operating expense or a reduction of revenue recognized from that same customer.
Consideration given to a customer is recorded as a reduction of revenue unless
both of the following conditions are met:

o We receive an identifiable benefit in exchange for the
consideration, and the identified benefit is sufficiently
separable from the customer's purchase of our products and
services such that we could have purchased the products from a
third party, and

o We can reasonably estimate the fair value of the benefit
received.

If both of the conditions are met, we record consideration paid to
customers as an expense. Consideration, including equity instruments, not
meeting the above criteria, is recorded as a reduction of revenue; to the extent
we have recorded cumulative revenue from the customer or reseller. Any
consideration in excess of cumulative revenue recognized from the customer or
reseller is recorded as an operating expense.

As a result, we reduced revenue by $114,200 for the year ended December
31, 2002 to reflect the amount by which the fair value of the shares of our
Series B convertible preferred stock issued to eBay Inc. in May 2002 exceeded
the amount invested by eBay in Dynabazaar.

DEVELOPMENT AND ENGINEERING

Development and engineering costs consist primarily of labor and
related costs for the design, deployment, testing and enhancement of the
Company's operating systems and are expensed as incurred except where eligible
for capitalization.

The Company capitalized costs for purchased software and for upgrades
and significant enhancements which were at least probable to result in increased
functionality of existing software. The Company capitalized certain development
and engineering costs associated with the design and implementation of its
systems for internal use, including internally and externally developed
software, in accordance with the American Institute of Certified Public

F-12

Accountants Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Accordingly, costs capitalized
were $0, $0 and $0 in 2004, 2003 and 2002, respectively. These costs are being
amortized over 36 months, which is the expected useful life of the software. The
amortization expense was $0, $46,000 and $102,000 in 2004, 2003 and 2002,
respectively.

INCOME TAXES

Deferred tax assets and liabilities are recognized based on the
expected future tax consequences, using current tax rates, of temporary
differences between the financial statement carrying amounts and the income tax
basis of assets and liabilities. A valuation allowance is applied against any
net deferred tax asset if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record compensation costs for stock-based employee compensation at
fair value. The Company has chosen to account for stock-based compensation
granted to employees using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation costs for
stock options granted to employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount that
must be paid by the employee to acquire the stock under the terms of the stock
option. Subsequent changes to option terms can also give rise to compensation.
Stock-based compensation issued to non-employees is measured and recorded using
the fair value method prescribed in SFAS No. 123.

The Company follows the disclosure provisions of SFAS No. 123 and has
applied APB Opinion No. 25 and related interpretations in accounting for its
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company's net loss for the years
ended December 31, 2004, 2003 and 2002 would have increased to the pro forma
amounts indicated below (in thousands, except per share amounts):

2004 2003 2002
---- ---- ----

Net loss
As reported .......................................................... $ (1,962) $ (4,722) $(22,115)
Add: Stock-based employee compensation expense included in
reported results .................................................. 107 480
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all awards ....... (334) (57) (1,524)
-------------------------------------
Pro forma ............................................................ $ (2,189) $ (4,299) $(23,639)
=====================================
Net loss per common share
As reported .......................................................... $ (0.07) $ (0.18) $ (0.79)
-------------------------------------
Pro forma ............................................................ $ (0.08) $ (0.18) $ (0.82)
=====================================

The fair value of each stock option is estimated on the date of grant
using the Black-Scholes valuation model with the following assumptions:

2004 2003 2002
---- ---- ----

Expected dividend yield.......................... 0% 0% 0%
Expected stock price volatility.................. 55% 60% 100%
Risk-free interest rate.......................... 4.2% 4.0% 4.1%
Expected option term............................. 10 years 5 years 7 years

F-13

COMPREHENSIVE LOSS

Comprehensive loss consists of net loss and other comprehensive income
(loss), which includes foreign currency translation adjustments and unrealized
gains and losses on marketable securities classified as available for sale.

FOREIGN CURRENCY

The functional currencies of the Company's foreign subsidiaries are the
local currencies. Assets and liabilities of the foreign subsidiaries are
translated into U.S. dollars at the rates of exchange in effect at the end of
the year. Revenue and expense amounts are translated using the average exchange
rates for the period. Net unrealized gains and losses resulting from foreign
currency translation are included in other comprehensive loss which is a
separate component of stockholders' equity. Net realized gains and losses
resulting from foreign currency transactions are included in the consolidated
statement of operations.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for stock -based Compensation (Revised). SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's instruments or that
may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123 (R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grand-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period). No compensation
costs are recognized for equity instruments for which employees do not render
the requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices
for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original immediately before the modification. The Company
has not completed its evaluation of SFAS No. 123(R) but expects the adoption of
this new standard will have an impact on operating result due the Company's use
of options as employee incentives.

3. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period plus the effect of any dilutive potential common shares.
Dilutive potential common equivalent shares consist of the assumed exercise of
stock options, the proceeds of which are then assumed to have been used to
repurchase outstanding stock using the treasury stock method, and the assumed
conversion of convertible preferred stock and warrants. Potential common shares
were excluded from the calculation of net loss per common share for the periods
presented since their inclusions would be antidilutive. At December 31, 2004,
there were options to purchase 1,824,000 shares of common stock outstanding, at
December 31, 2003 there were options to purchase 320,000 shares of common stock
outstanding and at December 31, 2002, there were options to purchase 3,571,000
shares of common stock outstanding all of which have been excluded from the
calculation of diluted net loss per common share.

F-14

4. MARKETABLE SECURITIES

Marketable securities classified as available-for-sale as of December
31, 2003 consist of the following (in thousands):

DECEMBER 31, 2003
-----------------
UNREALIZED UNREALIZED
GAINS IN LOSSES IN
ACCUMULATED ACCUMULATED
OTHER OTHER
AMORTIZED COMPREHENSIVE COMPREHENSIVE ESTIMATED
COST LOSS LOSS FAIR VALUE
---- ---- ---- ----------

Non-current:
Municipal bonds .................. 5,000 -- -- 5,000
---------------------------------------------------------------------
Total marketable securities ......... $ 5,000 $ -- $ -- $ 5,000
=====================================================================

Available-for-sale securities by contractual maturity are as follows
(in thousands):

DECEMBER 31,
2003
------------

Due in 1 year or less
Commercial paper.................................................................... $ --
Municipal bonds..................................................................... --
------------

Due in 1-2 years
Municipal bonds..................................................................... 5,000
------------
Total marketable securities............................................................ $ 5,000
============

5. RESTRICTED CASH

On September 8, 2003, the Company placed approximately $830,000, which was
included in Other Current Assets, into escrow with an independent escrow agent
in order to secure the obligations of the Company under individual severance
agreements with the former President and Chief Executive Officer for
approximately $467,000, Vice President of Sales and Marketing for approximately
$128,000 and Chief Financial Officer, Treasurer and Secretary for approximately
$235,000. The terms of the escrow agreement provide among other things that the
executive will receive full severance payment as provided in their agreement
upon the termination of the Transition Services Agreement between the Company
and eBay, Inc., subject to satisfactory performance. During 2004, these former
employees were paid in full.

Pursuant to an operating lease agreement for its previous headquarters in
Woburn, Massachusetts, the Company had placed a deposit of $473,000 with its
bank to collateralize an irrevocable stand-by letter of credit in the name of
the landlord (see Note 8). In January 2004, this deposit was released in
connection with the lease settlement agreement to pay due expenses relating to
this office space. In addition to the letter of credit at December 31, 2004 and
December 31, 2003 we have nil and $50,000 of restricted cash, that was related
to a disputed contract with a vendor, respectively. This dispute was settled
during 2004 for approximately $43,000.

Pursuant to an Asset Purchase Agreement with Ebay the Company placed $2 million
of the consideration be held in escrow in order to secure the Company's
indemnification for certain representations and warranties. The indemnification
is capped at $2 million and is for a period of two years following the closing
of the asset sale (See Note 9). This amount is included in Other current assets
at December 31, 2004.

F-15

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

DECEMBER 31,
------------
2004 2003
---- ----

Computer equipment .............................. $ -- $ 6,850
Furniture and fixtures .......................... 92
Leasehold improvements .......................... 212
---------------------------
Property and equipment .......................... 7,154
Less accumulated depreciation ................... (7,045)
---------------------------
Property and equipment, net ..................... $ -- $ 109
===========================

Depreciation expense was $109,000, $1.2 million and $2.9 million for
the years ended December 31, 2004, 2003 and 2002, respectively.

7. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

DECEMBER 31,
------------
2004 2003
---- ----

Payroll and benefits ............................ -- $ 18
Professional fees ............................... 170 132
Other ........................................... 26 884
---------------------------
Total accrued expenses .......................... $ 196 $ 1,034
===========================

8. COMMITMENTS AND CONTINGENCIES

The company was obligated under a lease agreement for office space through 2005
for the Company's previous headquarters in Woburn, Massachusetts. The Company's
base rental obligations were approximately $1.5 million annually. In addition,
the Company was required to maintain a security deposit in the form of an
irrevocable, freely transferable letter of credit. At December 31, 2003, this
security deposit was $473,000, which is recorded as restricted cash on the
consolidated balance sheets.

In December 2000, the Company entered into a two-year agreement to sublease its
excess office space under this lease, which ended in October 2002. In November
2002, the Company entered into a two-year agreement to sublease approximately
11,000 square feet of its excess office space under this lease, which was due to
expire in December 2004.

On January 20, 2004, the Company and its landlord agreed to terms in which the
Company's obligation under the lease agreement would be terminated. According to
the settlement agreement, the Company was obligated to pay the landlord a sum
$1.2 million, which was paid in March 2004. In addition to the lease settlement,
the 473,000 security deposit was taken by the landlord to pay past due expenses.
The Company vacated the premises by April 10, 2004.

The Company and its subsidiary, Dynabazaar UK Ltd, was obligated under a lease
for office space in Twickenham, UK. The Company was obligated to pay
approximately $270,000 annually. On September 28, 2004, the Company executed a
settlement with Regal House Limited, the landlord of the Company's London, UK
headquarters, providing for termination of the Company's lease in consideration
of a cash payment of approximately $463,000. The cash payment was drawn from the
security deposit of approximately $569,000 held by the landlord. The remaining
balance of $106,000 was returned to us.

F-16

Rental expense, net of sublease income, under operating leases amounted to
approximately $200,000, $1.7 million and $1.7 million for the years ended
December 31, 2004, 2003, and 2002, respectively.

INDEMNIFICATION OBLIGATIONS

In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. FIN 45 also
requires additional disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. The accounting requirements for the initial recognition of
guarantees are applicable on a prospective basis for guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
all guarantees outstanding, regardless of when they were issued or modified,
during the first quarter of fiscal 2003. The adoption of FIN 45 did not have an
effect on the Company's consolidated financial statements. The following is a
summary of the agreements that the Company has determined are within the scope
of FIN 45.

As permitted under Section 145 of the Delaware General Corporation Law,
the by-laws of Dynabazaar, Inc. provide that Dynabazaar shall, to the extent
legally permitted, indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding by reason of the fact that such person is or was, or has agreed to
become, a director or officer of Dynabazaar, or is or was serving, or has agreed
to serve, at the request of Dynabazaar, as a director, officer, trustee,
partner, employee or agent of, or in a similar capacity with, another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. The indemnification provided for in the by-laws is expressly not
exclusive of any other rights to which those seeking indemnification may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such persons. The term of the indemnification period is
for the officer's or director's lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have a Director and Officer insurance policy that enables
us to recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. We have no liabilities recorded for these agreements as
of December 31, 2004.

Our customer contracts contain indemnification provisions as a standard
term of those contracts. Generally, these indemnification provisions require
that we indemnify, defend and hold harmless the customer and certain related
parties for third party claims, liabilities and costs arising from the breach of
any warranty, representation or covenant in the agreement by us or any claim
that our technology or service infringes or violates any third party's
copyright, patent, trade secret, trademark, right of publicity or right of
privacy or contains any defamatory content. Generally, our aggregate potential
liability under these indemnification provisions is capped at the total amount
paid to us by the customer under the contract, although some customer contracts
contain higher limits and some contain no limit for specified types of claims.
The term of these indemnification provisions is generally perpetual from the
time of execution of the agreement. Some of our other types of agreements with
third parties contain similar provisions. We believe the estimated fair value of
these indemnification agreements is minimal and we have no liabilities recorded
for these provisions as of December 31, 2004. In 2003, eBay asserted two
indemnification claims against us under one of our commercial agreements with
eBay. In one case, the claim is based upon a third party alleging that certain
of our former technology utilized by eBay infringes certain patents of the third
party. In the second case, the claim is based upon a third party alleging that
certain technology utilized by eBay, which may include our former technology,
infringes certain patents of such third party. No lawsuits have been filed.
Given the early stage of these claims at this time, we cannot make a
determination as to the ultimate outcome of these matters and the impact, if
any, on our financial condition, liquidity or results of operations.

Under the terms of the Asset Purchase Agreement, we have agreed to
indemnify, compensate and reimburse eBay and certain affiliates for losses
arising or resulting from, or connected with, breaches of our representations
and warranties under the Asset Purchase Agreement or breaches of our covenants
under the Asset Purchase Agreement or the TSA, certain liabilities relating to
persons who are our employees prior to the closing of the asset sale,
liabilities relating to certain intellectual property matters, any liabilities

F-17

not specifically assumed by eBay, and certain liabilities related to any bulk
transfer law or similar requirement or claims for damages in connection with the
asset sale pursuant to fraudulent transfer, successor liability, bankruptcy or
similar laws. In order to secure our indemnification, compensation and
reimbursement obligations to eBay, $2 million of the purchase price was
deposited in an escrow account with an independent escrow agent at the time of
the closing of the asset sale. Except as noted below, our liability for claims
relating to breaches of our representations and warranties, is limited to the
amount of indemnifiable losses in excess of $50,000 and eBay's sole and
exclusive remedy with respect to such claims is recourse to the amounts in the
escrow account. Except as noted below, the amount of our indemnification,
compensation and reimbursement obligations with respect to breaches of our
representations and warranties relating to (1) intellectual property matters
will not exceed $2 million, and (2) other representations and warranties will
not exceed $1 million. However, none of the foregoing limitations apply to (1)
breaches of covenants under the Asset Purchase Agreement, (2) our
indemnification obligations under the terms of the existing commercial
agreements solely between eBay and Dynabazaar with respect to matters arising
prior to the closing of the asset sale, which indemnification obligations will
continue following the asset sale, (3) liabilities retained by Dynabazaar, or
(4) fraud or intentional misrepresentation. The Company has estimated the fair
value of the indemnification to be $2 million at December 31, 2004 and has
recorded it as "Other Current Liabilities on the accompanying balance sheet at
December 31, 2004.

9. GAIN ON SALE OF ASSETS

On June 20, 2003, the Company entered into an Asset Purchase Agreement
(the "Agreement") with eBay, Inc. ("eBay") to sell substantially all of the
Company's technology and business assets to eBay. Under the Agreement, the
Company sold to eBay substantially all the Company's business assets for $4.5
million in cash.

The Agreement also provided that $2 million of the consideration be
held in escrow in order to secure the Company's indemnification for certain
representations and warranties. The indemnification is capped at $2 million and
is for a period of two years following the closing of the asset sale. The
Company estimated its potential liability under the indemnification to be $2
million in accordance with FASB Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45") and recorded such liability as a reduction in
the gain on the sale of assets.

The Company recorded a gain on the sale of assets of $1,183,000 based
on the proceeds less direct costs of $1,317,000 and the indemnification
liability noted above, which is recorded in the results of operations for the
year ended December 31, 2003.

The Company also entered into a Transition Services Agreement ("TSA")
with eBay pursuant to which the Company is providing services to eBay to fulfill
customer service obligations under customer contracts assumed by eBay. Under the
TSA, eBay is paying the Company a fee which is substantially equal to the costs
incurred by the Company to continue to provide that service. The Company
recorded $336,000 of revenue for the period from September 4, 2003 through
December 31, 2003 related to the TSA.

10. STOCKHOLDERS' EQUITY

At December 31, 2004 and 2003, the authorized capital stock of the
Company consisted of (i) 90,000,000 shares of voting common stock with a par
value of $0.001 per share and (ii) 10,000,000 shares of preferred stock with a
par value of $0.001 per share. The Company's Board of Directors has the
authority to determine the voting powers, designations, preferences, privileges
and restrictions of the preferred shares.

On October 10, 2003, the Company declared a cash dividend of $1.30 per
share on the Company's common stock, representing an aggregate cash distribution
of approximately $35 million. The dividend was paid on November 3, 2003 to
stockholders of record on October 20, 2003.

F-18

11. SERIES B PREFERRED STOCK

On May 17, 2002, the Company completed a private placement of 952,380
shares of its Series B redeemable convertible preferred stock, par value $0.001
per share, to eBay Inc. for an aggregate purchase price of $2.0 million. The
Series B preferred stock is entitled to cash dividends payable quarterly at the
rate of 6.5% per annum in preference to any dividend on any other series of
preferred stock or common stock. The dividends are cumulative and are entitled
to participate on a pro rata basis in any dividend paid on the common stock on
an as if converted basis. The Series B preferred stock is convertible into
shares of common stock on a one-for-one basis, subject to certain adjustment
mechanisms including a weighted average anti-dilution mechanism. In the event of
any liquidation, dissolution or winding up of the Company (a "Liquidation"), the
holders of the Series B preferred stock are entitled to receive, in preference
to the holders of certain junior securities, as defined, a per share amount
equal to $2.10 plus all accrued and unpaid dividends (the "Liquidation
Preference"). In the event of a Liquidation, after payment of the Liquidation
Preference and any other liquidation preference on any other series of stock,
the Series B preferred stock is entitled to participate on a pro rata basis with
the common stock in the distribution of the remaining assets of the Company on
as if converted basis. The holders of the Series B preferred stock have the
right to require the Company to redeem the Series B preferred stock at any time
after the earlier of (a) May 17, 2003, and (b) the happening of a material
adverse effect on the Company's business, as defined. The Company had the right,
at any time after May 17, 2004, to redeem the outstanding Series B preferred
stock at $2.10 per share plus all accrued and unpaid dividends. The net proceeds
from this offering, after issuance costs, totaled $1.8 million. At the issuance
date, the Company estimated the fair value of the Series B preferred stock to be
in excess of the amount paid by eBay by $114,200. As a result, the Company
recorded an $114,200 adjustment to increase the carrying value of this
investment and decrease revenue from eBay, Inc. in accordance with EITF 01-09
(see Note 2.) The Company accreted the carrying value of the Series B preferred
stock up to $2.0 million through May 2003 in accordance with the redemption
feature described above. The Company recorded $33,000 in accretion in the year
ended December 31, 2003. At December 31, 2003, the carrying value of the Series
B preferred stock was $0.

In connection with the closing of the asset sale, eBay, Inc., the
holder of Dynabazaar's Series B preferred stock (the "Series B Shares"),
provided notice to Dynabazaar that it had elected to receive a liquidation
preference equal to approximately $2 million in the aggregate, or $2.10 per
share, plus all accrued and unpaid dividends with respect to the Series B
Shares. The liquidation preference and accrued and unpaid dividends were paid to
eBay, Inc. on September 5, 2003 in the amount of approximately $2,024,000. On
September 29, 2003, the Company repurchased from eBay all of the Series B Shares
for a purchase price of $1,466,665 in cash. The payment represented payment in
full for any and all obligations of the Company in respect of the Series B
Shares.

TREASURY STOCK

On August 8, 2002, the Company repurchased the 3,181,000 shares of its
common stock, par value $.001 per share, held by Scott Randall, the original
founder of Dynabazaar, at a price of $1.27 per share. These shares represented
10.8% of the Company's outstanding common stock at that time. In 2003 the
Company sold 612,000 shares of treasury stock with a par value $.001 and a cost
of $1.27 per share, in connection with the with the exercise of employee stock
options.

On August 20, 2004, the Company announced that the Board of Directors
had authorized the repurchase of up to 5 million shares of the Corporation
common stock. To date, we have purchased 81,800 shares at an average price per
share of $0.2689.

12. STOCK OPTION PLANS

2000 STOCK OPTION AND INCENTIVE PLAN

In February 2000, the Company's Board of Directors and stockholders
approved the 2000 Stock Option and Incentive Plan (the "2000 Plan"), which
provides for the issuance of up to 4,017,250 shares of common stock plus the
number of shares as to which options granted under the 1997 and 1999 Plans are
forfeited or otherwise terminate unexercised. This plan provides for awards in
the form of ISOs, NSOs, restricted stock awards and other forms of awards to
officers, directors, employees and consultants of the Company. At December 31,
2004, there were 5,585,662 shares available for issuance under this plan.

F-19

The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the times at
which each option vests. For holders of 10% or more of the Company's outstanding
common stock, ISOs may not be granted at less than 110% of the fair market value
of the common stock at the date of grant.

2000 EMPLOYEE STOCK OPTION AND INCENTIVE PLAN

In October 2000, the Company's Board of Directors approved the 2000
Employee Stock Option and Incentive Plan (the "2000 Employee Plan"), which
originally provided for the issuance of up to 1,500,000 shares of common stock,
under NSOs to employees and key persons of the Company other than any member of
the Company's Board of Directors or any other individual who is subject to the
reporting and other provisions of Section 16 of the Securities Exchange Act of
1934. In January 2001, in connection with the one-time employee option exchange
incentive program described below, the Board of Directors amended this plan to
increase the number of shares of common stock available for issuance under the
plan to 2,654,750. At December 31, 2004, there were 2,450,374 shares available
for issuance under this plan.

The Board of Directors determines the term of each option, the option
price, the number of shares for which each option is granted and the times at
which each option vests.

The following table summarizes information about stock options
outstanding at December 31, 2004:

OPTIONS OUTSTANDING OPTIONS OUTSTANDING
------------------- -------------------
WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE PER NUMBER LIFE PRICE PER NUMBER PRICE PER
SHARE OUTSTANDING (IN YEARS) SHARE EXERCISABLE SHARE
----- ----------- ---------- ----- ----------- -----

$0.31 - $0.34 1,824,000 10 $0.32 $1,824,000 $0.32
------------------------------------------------------------------------------------------------------

Stock option activity for the years ended December 31, 2004, 2003 and
2002 is as follows:

2004 2003 2002
-------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER OF PRICE PER NUMBER OF PRICE PER NUMBER OF PRICE PER
SHARES SHARE SHARES SHARE SHARES SHARE
------ ----- ------ ----- ------ -----

Outstanding at beginning of
period........................... 320,000 $0.33 3,570,537 $1.71 4,809,243 $2.27
Granted............................. 1,504,000 0.32 597,000 0.91 1,421,500 1.35
Exercised........................... (585,124) 0.74 (533,593) 0.47
Canceled............................ (3,262,413) 1.87 (2,126,613) 3.05
-------------------------------------------------------------------------------
Outstanding at end of period........ 1,824,000 $0.32 320,000 $0.33 3,570,537 $1.71
===============================================================================

Options exercisable at end of
period........................... 1,824,000 $0.32 320,000 $0.33 1,580,050 $2.08
Weighted average fair value of
options granted during the
period at fair value............. $0.32 $0.18 $1.11
===============================================================================

The Company is recognizing the compensation expense over the vesting
period. For the years ended December 31, 2004, 2003 and 2002, related expense
recognized was zero, $107,000, and $480,000 respectively.

F-20

13. REVENUES AND LONG-LIVED ASSETS BY GEOGRAPHIC REGION

The table below presents revenues by principal geographic region for
the years ended December 31, 2004, 2003 and 2002 (in thousands):

DECEMBER 31,
------------
2004 2003 2002
---- ---- ----

United States.......................................................... $ -- $ 5,120 $ 4,194
United Kingdom......................................................... 1,479 1,446
Other.................................................................. 74 107
-----------------------------------
Consolidated........................................................... $ -- $ 6,673 $ 5,747
===================================

The table below presents long-lived assets by principal geographic
region (in thousands):

DECEMBER 31,
------------
2004 2003
---- ----

United Kingdom......................................................... $ -- $ 109
======================

14. INCOME TAXES

The provision for income taxes consists of the following (in
thousands):

YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
---- ----

FEDERAL STATE FOREIGN TOTAL FEDERAL STATE FOREIGN TOTAL
------- ----- ------- ----- ------- ----- ------- -----

Current................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Deferred............... $ 665 $ 117 -- $ 782 $ 1,519 $ 260 $ 14 $ 1,793
Valuation allowance.... (665) (117) -- (782) (1,519) (260) (14) (1,793)
---------------------------------------------------------------------------------------------------
Total.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
===================================================================================================

The Company's effective tax rate varies from the statutory rate as
follows:

YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
---- ----

U.S. federal income tax rate........................................... (34.0)% (34.0)%
State taxes............................................................ (6.0) (6.0)
Other.................................................................. .1 .1
------------------------
(39.9) (39.9)
Valuation allowance.................................................... 39.9 39.9
------------------------
--% --%
========================

The Company's federal statutory income tax rate for 2004 and 2003 was
34%. For 2004 and 2003, the Company recorded no income tax benefit and recorded
a full valuation allowance against net operating losses due to uncertainties
related to realizability of these tax assets.

Deferred tax liabilities and assets are determined based on the
difference between financial statement and tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
components of the deferred taxes at December 31, 2004 and 2003 were as follows
(in thousands):

F-21

DECEMBER 31,
------------
2004 2003
---- ----

Net operating loss carryforwards....................................... $ 21,500 $ 50,518
Capitalized start-up costs............................................. 49
Capitalized research and development................................... 3,809
Depreciation........................................................... 150
Deferred revenue.......................................................
Other.................................................................. 31
--------------------------
21,500 54,557
Valuation allowance.................................................... (21,500) (54,557)
--------------------------
Net deferred tax assets................................................ $ -- $ --
==========================

In connection with ownership changes, it was determined that certain of
the Company's net operating loss carryfowards ("NOL") have been limited. The
Company recently completed an Internal Revenue Code Section 382 evaluation that
quantified the limitation of the ("NOL"). As of December 31, 2004, the Company
has approximately $15.0 million of NOL's that can be utilized in the current tax
year. These NOL's begin to expire in 2022. A valuation allowance has been
established for the full amount of the deferred tax asset since it is more
likely than not that the deferred tax asset will not be realized.

Ownership changes resulting from the Company's issuance of capital
stock may further limit the amount of net operating loss carryforwards that can
be utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.

15. EMPLOYEE BENEFIT PLAN

In January 1999, the Company established a savings plan for its
employees which is designed to be qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the 401(k) plan
through payroll deductions within statutory and plan limits. The Company made no
contributions for the years ending December 31, 2004, 2003 and 2002.

16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

The following table sets forth certain unaudited quarterly results of
operations of the Company for the years ended December 31, 2004 and 2003. In the
opinion of management, this information has been prepared on the same basis as
the audited consolidated financial statements and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the quarterly information when read in
conjunction with the audited consolidated financial statements and related notes
included above. The quarterly operating results are not necessarily indicative
of future results of operations.

FOR THE QUARTER ENDED
---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2004 2004 2004 2004
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue ...................................................... $ -- $ -- $ -- $ --
Gross profit ................................................. -- -- -- --
Net income (loss) ............................................ (580) (575) (359) (448)
Basic and diluted net income (loss) per common share ......... $ (0.02) $ (0.02) $ (0.01) $ (0.02)

F-22

FOR THE QUARTER ENDED
---------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2003 2003 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue ...................................................... $ 1,357 $ 1,516 $ 2,321 $ 1,479
Gross profit ................................................. 598 950 1,942 1,098
Net income (loss) ............................................ (1,602) (1,968) 1,113 (2,142)
Basic and diluted net income (loss) per common share ......... $ (0.06) $ (0.07) $ 0.04 $ (0.09)

17. RESTRUCTURING CHARGES

In June 2002, as part of the Company's plan to continue to implement
cost-cutting measures, the Company eliminated 18 positions worldwide,
representing approximately 31% of its total employee base. In addition, the
Company relocated its U.K. data center to the U.S. The Company recognized a
charge of $530,000 in the second quarter of 2002 for the costs related to these
initiatives, of which $200,000 related to non-cash costs for the write-down of
computers and equipment. At December 31, 2002, all of the expenses relating to
the restructuring had been paid.

18. UNUTILIZED OFFICE SPACE CHARGE

In the fourth quarter of 2003 and first quarter of 2002, we recorded
charges of $160,000 and $4.5 million, respectively, for unutilized office space
at our Woburn, Massachusetts headquarters. This charge included rent and other
related costs for a significant portion of our leased space which has been
vacated for the remaining lease term and the write-down of related leasehold
improvements and furniture and fixtures. In the fourth quarter of 2002, we
recorded a reversal of $513,000 related to a sublease of approximately 11,000
square feet of the unutilized office space. During 2003, we charged $1.0 million
against this reserve which represented rent payments related to unutilized
office space. During 2002, we charged $746,000 against this reserve, which
represented rent payments related to unutilized office space. In addition, we
recorded $1.2 million for the write-down of leasehold improvements and furniture
and fixtures.

On January 20, 2004, the Company and its landlord agreed to terms in
which the Company's obligation under the lease agreement would be terminated.
According to the settlement agreement, the Company was obligated to pay the
landlord a sum $1.2 million, which was paid in March 2004. The Company vacated
the premises by April 10, 2004.

On September 28, 2004, the Company executed a settlement with Regal
House Limited, the landlord of the Company's London, UK, headquarters, providing
for termination of the Company's lease in consideration of a cash payment of
approximately $463,000. The cash payment was drawn from the security deposit of
approximately $569,000 held by the landlord. The remaining balance of $106,000
was returned to us.

Initial charge recorded in March 2002 ............................................ $ 4,500
Non-cash write-down of leasehold improvements and furniture and fixtures ......... (1,161)
Cash payments made in 2002 ....................................................... (746)
Reversal of accrual in December 2002 ............................................. (513)

Unutilized space accrual at December 31, 2002 .................................... 2,080
Cash Payments made in 2003 ....................................................... (1,080)
Settlement accrual ............................................................... 160

Unutilized space accrual at December 31, 2003 .................................... 1,160
Cash payments made in 2004 ....................................................... (1,200)

Unutilized space accrual at December 31, 2004 .................................... $ --
============

F-23

19. LEGAL PROCEEDINGS

The Company is subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. While the outcome of these matters
is currently not determinable, we do not expect that the ultimate costs to
resolve these matters will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.

We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynabazaar), John Belchers (former Chief
Financial Officer of Dynabazaar), U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynabazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynabazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynabazaar's initial public offering which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10 (b) of the Securities Exchange Act of 1934 as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities of 1933, as amended. The Company has
entered into an agreement-in-principle to settle the remaining claims in the
litigation. The proposed settlement will result in a dismissal with prejudice of
all claims and will include a release of all claims that were brought or could
have been brought against the Company and its present and former directors and
officers. It is anticipated that any payment to the plaintiff class and their
counsel will be funded by the Company's directors & officers liability insurance
and that no direct payment will be made by the Company. The proposed settlement
is subject to the execution of a definitive settlement agreement, final approval
of the settlement by the Company's directors & officers liability insurance
carriers and by the plaintiff class, and the approval of the settlement by the
Court.

F-24

DYNABAZAAR, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

BALANCE AT BALANCE
BEGINNING CHARGED TO AT END OF
DESCRIPTION OF PERIOD OPERATIONS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------

Year ended December 31, 2002:
Allowance deducted from asset accounts:
Allowance for doubtful accounts .................... $ 563 (177) (119) $ 267
Deferred tax asset valuation allowance ............. $ 43,936 8,810 -- $ 52,764
Year ended December 31, 2003:
Allowance deducted from asset accounts:
Allowance for doubtful accounts .................... $ 267 2 (107) $ 162
Deferred tax asset valuation allowance ............. $ 52,764 1,793 -- $ 54,557
Year ended December 31, 2004:
Allowance deducted from asset accounts:
Allowance for doubtful accounts .................... $ 162 144 (306) $ --
Deferred tax asset valuation allowance ............. $ 54,557 5,099 (44,840) $ 14,816

II-1

EXHIBIT INDEX

EXHIBIT NO. TITLE
----------- -----

------------

* Filed with this Report.

(1) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Registration Statement on Form S-1 (No. 333-92677),
as amended, filed with the SEC.

(2) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Current Report on Form 8-K dated May 17, 2001 filed
with the SEC on May 22, 2001.

(3) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 filed with the SEC on November 9, 2001.

(4) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the SEC on March 31, 2002.

(5) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 filed with the SEC on May 14, 2002.

(6) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Report on Form 8-K filed with the SEC on May 20,
2002.

(7) Included as an exhibit to, and incorporated in this Report by reference
to, the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 filed with the SEC on August 14, 2002.